Open My Account

Defining a Fiduciary

Estimated reading time: 2 minutes, 42 seconds

We’ve posted in detail the activities in Washington regarding the DOL Fiduciary Rule and whether it is truly dead. And now, states like Massachusetts, New Jersey, and Nevada are pursuing their own state-specific fiduciary rules. But those not deeply ingrained in the investing world may not fully comprehend the scope of that activity because of a lack of understanding about the term “fiduciary.”

So, in this brief post from Kingdom Trust, let’s go over the basics of a fiduciary.

First, we must begin with the Employee Retirement Income Security Act (ERISA) of 1974. According to the Department of Labor (DOL), ERISA protects a retirement account’s assets by requiring that those persons or entities with certain discretionary control or authority over plan management or plan assets or anyone providing (or having the responsibility to provide) investment advice to a plan are subject to fiduciary responsibilities.

In the 1970s, the government observed many pension plan participants losing benefits due to potential mismanagement. As a result, ERISA orders the plan administrators, in this example, to adhere to certain “fiduciary” responsibilities.

Besides plan administrators, who else are plan fiduciaries? It really depends on the specifics of the plan, but it’s based on the functions the individual performs. More specifically, Section 3(21)(A) of ERISA defines a fiduciary as a person, with respect to a retirement plan, that

  • exercises any discretionary authority or control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets;
  • renders investment advice for a fee or other compensation, direct or indirect, with respect to any money or other property of such plan, or has any authority or responsibility to do so; or
  • has any discretionary authority or responsibility in the administration of such plan.

So, asset managers, executors, trustees, investment managers and advisors, and members of a plan’s investment committee are some of the most common fiduciaries of a plan—again, depending on the type of plan. In Self-Directed IRAs, for example, account holders also act as a fiduciary. They implement decisions relating to the management of the plan, hires those that may render investment advice, and so on.

The DOL Fiduciary Rule, proposed state fiduciary rules, and ERISA before them all seek to protect plan mismanagement and abuse. While the details vary (part of the reason for the continued legislative activity), each strives to help protect plan assets.

Fiduciaries must act prudently, solely in the interests of plan participants, account holders, and beneficiaries, and for the purpose of providing benefits and paying reasonable expenses for plan administration. They do this by providing financial and other plan information and adhering to established standards of conduct—yet another area of debate in Washington.

Fiduciaries must diversify plan investments to minimize risk of large losses (unless there exists clear prudence not to do so). They must follow the terms of the plan documents. In addition, they must avoid conflicts of interest (including, but not limited to, self-dealing). And fiduciaries failing to comply with these standards may be personally liable for any losses incurred by the plan. It may even lead to criminal liability.

Schedule a conference with your investment advisor, plan administrator, or related individual for any questions you have about plan fiduciaries. And, of course, continue to visit our site for updates on any changes to fiduciary rules and regulations.

This site uses cookies to learn how to communicate better with our website visitors and share the most relevant information. By continuing to browse the site, you are agreeing to the use of our cookies. Privacy Policy
You are currently allowing us to set cookies. Privacy Policy